As options dwindle, rail becomes the ticket for Canadian oil exports

15 March 2019 Consulting.ca

A delay in a permit for Enbridge’s Line 3 US is pushing Alberta toward further expansion in rail-based export capacity.

Due to a severe lack of export capacity, Canadian oil price benchmarks collapsed in Q4 of 2018, with Western Canadian Select dropping to approximately US$12 a barrel in November. With a lack of pipeline capacity and a high number of refineries going offline in the Midwest US, storage stockpiles reached a staggering 35 million barrels in Alberta.

Due to supply glut and low prices, the provincial government in January implemented mandatory production cuts to reduce volume by 325,000 barrels per day (bbl/d) until excess storage volume disappeared, followed by a 95,000 bbl/d production cut.

The Alberta government also purchased additional railcars to increase export capacity by 120,000 bbl/d by 2020. For now, the expanded Trans Mountain pipeline to British Columbia – and the promise of higher global Brent crude prices – remains stalled in consultations.

Alberta was, however, counting on Enbridge’s Line 3 pipeline to add 370,000 bbl/d in export capacity to the US by late 2019. A Deloitte report stated that the Enbridge line would increase US export capacity by 9%, playing a major role in relieving Albertan oversupply and low prices.

As options dwindle, rail becomes the ticket for Canadian oil exports

New has since broken revealing a one-year permit delay on the Enbridge Line 3 replacement project – a major blow to the province’s ambitions.

In light of the developments in Alberta’s oil industry, Houston-based energy consulting firm Stratas Advisors has released a new report titled, “Hither or Wither: Will Canadian Producers Rail More to the U.S. or Cut Back?"

The firm’s analysis expects Alberta’s mandatory price cuts to cause a crude output drop in 2019, but by 2020 production is projected to return to pre-curtailment levels as new projects begin.

"Alberta has acted decisively to curtail producer output to reduce local crude stock overhangs in Alberta's storage facilities,” Greg Haas, director of the integrated energy and midstream practice at Stratas Advisors, said. “Prices have more than doubled as a result of the first two months of the curtailment program.”

Since hitting its November low point, Western Canadian Select has reached US$48.61 this month, according to figures from Oilprice.com.

Meanwhile, the Line 3 delay seems to make train export to the US is reasonable amid dwindling options. "The Line 3 delay leaves fewer transport options available to producers,” Stephen Beck, director of Stratas’ upstream practice, said. “Hence, rail will be an important outlet as the government gradually lifts production restrictions."

Though moving crude by rail is usually costlier than pipelines, the option still makes economic sense for Canada’s oil industry. “Even at higher prices, railing Alberta's crude to key US refinery market regions should be economically attractive through this year and next given the delay in the permitting and presumed startup timeframe for the only viable pipeline expansion,” Haas said.

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